Tariff escalation refers to a situation where tariffs rise
along processing chains. This practice can afford significant protection to
processed products in importing countries, depending on the share of value-added
in final output. Thus, tariff escalation effectively limits the scope for
processing of agriculture and labour-intensive products in exporting countries.
The issue of tariff escalation in agricultural products is gaining more
importance given the fact that growth in agricultural trade is shifting more to
processed products. Countries with high dependence on commodity exports have a
strong interest in this matter as they are trying to escape from the circle of
producing and exporting primary products.

The existence of tariff escalation in agricultural markets is
regarded as one of the major factors that hinder export growth and
diversification and sustainable development in the exporting countries. Two
aspects of this effect are seen as critical. First, tariff escalation has the
potential of hindering the growth of agricultural processing in the exporting
countries. It reduces demand for more processed imports from exporting
countries, and hence the expansion of their processing industries, the means of
accumulating skills and capital, and export diversification. In addition, the
concentration of exports in less processed commodities often results in slower
export growth and greater exposure to the risk of commodity price
volatility.

Second, tariff escalation is perceived as a source of
environmental damage to exporting countries - a tax on sustainability. There are
many possible ways in which tariff escalation may hurt the environment. The
excessive reliance on primary product exports is likely to cause over-depletion
of natural resources and disturb the ecological balance of the country. The
increased stress on the production and export of raw materials will lead to
"excessive" extraction of natural resources, with the consequent degradation of
the resource base.[77] In addition, the slower
rate of growth of income as a result of over-exploitation of resources will
leave fewer resources available for efficient environmental management in
exporting countries.

Reducing tariff escalation figured out as an important issue
in the on-going WTO negotiations on agriculture. This article examines tariff
escalation in agricultural commodity markets. Section 2 examines the evolution
of trade in processed agricultural products during 1981-2000 and highlights
major constraints for its expansion in developing countries. Section 3 provides
a brief description of the measurement of tariff escalation and section 4
reviews some recent empirical work assessing tariff escalation in the
post-Uruguay Round period. Section 5 assesses the magnitude of escalation in
both bound and applied tariffs in selected major agricultural commodity chains
and Section 4 highlights possible changes in their structure under different
methods of tariff reduction, and section 6 concludes and raises some policy
issues.

2. Evolution of trade in processed
agricultural products

Over the last 20 years, world trade in processed agricultural
products grew faster than in primary agricultural products. As a group, exports
of processed agricultural products grew at 6 percent annually during the period
1981-2000 (compared to 3.3 percent for primary products), raising their world
market shares in total agricultural trade from 60 percent in 1981-1990 to 66
percent in 1991-2000 (Table 1). Growth rates have been exceptionally high (above
the average 6 percent) for the processed forms of cereals, fruit, vegetables,
pulses, tropical beverages and poultry products (Figure 1).

Table 1. Value of world agricultural exports, all
commodities (crops and livestock)

Value of world agricultural exports a (million
US$)

Share in total world agricultural exports(percent)

Primary

Processed

Primary

Processed

1981 - 1990

111 805

160 996

40

60

1991 - 2000

1662 49

310 019

34

66

a/ Includes intra-EU trade.

Source: Computed from FAOSTAT (2003)

Low income elasticity of demand for primary commodities and
declining intensity of raw materials use in economic activities have been shown
to be the major factors that led to the decline in the share of primary
commodity trade (World Bank, 1994). Several studies have also shown that changes
in the organizational structure of commodity markets may have contributed to the
decline in the share of primary commodities in total trade. The high costs
associated with processing, packaging, advertising, marketing and distribution
mean that the cost of primary commodities as a share of the processed product
price is usually small (OECD, 2001).

Although some of the developing countries have increased their
share in world exports of processed agricultural
products,[78] the developed countries captured
the bulk of the rapidly growing trade in this sector. High dependence on exports
of primary agricultural products continued to be a prominent feature in many
developing countries, particularly the least developed countries
(LDCs).[79] The share of developing countries
in world exports of processed agricultural products decreased from 27 percent in
1981-1990 to 25 percent in 1991-2000 (Table 2). For LDCs as a group, the share
in processed agricultural exports fell sharply from 0.7 percent to 0.3
percent.

Table 2. Share in world agricultural exports, all
commodities (crops and livestock)

Primary products

Processed products

Developed

Developing

LDCs

Developed

Developing

LDCs

1981 - 1990

66.2

33.8

3.1

73.0

27

0.7

1991 - 2000

67.4

32.6

2.2

75.0

25

0.3

Source: Computed from FAOSTAT
(2003)

The decline of the share of developing countries in world
exports of processed products was more evident in such products as cocoa and
coffee. The share of the top ten cocoa-producing developing countries in world
exports declined as the stage of processing increased. In 1996-99, the shares of
these countries in world exports of cocoa beans, cocoa butter, cocoa powder and
chocolate were 83 percent, 30 percent, 18 percent and 1 percent respectively.
While the share of chocolate exports in total cocoa trade rose from 20 percent
in 1970-75 to 56 percent in 1996-99, the share of these countries in chocolate
exports declined from 1.3 percent to only 1 percent during the same period.
Similarly, the share of the top 10 coffee-producing developing countries in
green coffee remained unchanged at about 67 percent between 1970-75 and 1996-99,
but their share in roasted coffee declined from 10 to 2 percent during the same
period.

The declining shares of developing countries in world
processed agricultural exports have been attributed to several factors. Market
access and market entry barriers in importing countries have limited the ability
of developing countries to expand exports of their processed products. Tariff
escalation, in particular, is often considered to be the major market access
barrier for most of the processed agricultural exports of the developing
countries.

Several studies have shown that agricultural commodity chains,
particularly those of high value crops and processed products, are increasingly
dominated by a few multinational enterprises (MNEs) and distribution
companies.[80] Growing concentration may affect
access to markets and returns to developing countries for their primary
products.

Other major challenges facing many developing countries,
particularly LDCs, are internal supply constraints that limit the ability of
these countries to take advantage of the trading opportunities in processed
agricultural products. These include weak technology; insufficient transport,
storage and marketing infrastructure; inadequate legal and regulatory
arrangements; and policy-induced disadvantages resulting from trade and
macroeconomic policies that are biased against agriculture and
exports.

While the nominal tariff wedge (TW) is simple and easy to
calculate, it has a major limitation in that it does not fully measure the
intensity of protection accorded to the final product. First, the nominal tariff
wedge measure does not provide information about the impact of the tariff
structure on the value added of the final product. Second, it compares nominal
tariffs of final output and only one input. As explained by Lindland (1997), TW
can hardly be applied to fabrication processes involving multiple inputs and/or
multiple outputs.

The intensity of protection for a product can best be measured
by the effective rate of protection (ERP),[81]
which assesses how tariffs affect the value-added of the processed commodity and
takes into account tariffs on multiple inputs. The ERP is defined as the change
in value added, made possible by the tariff structure, as a percentage of the
free trade value added:

VAf and VAd> 0 (2)

where,

VAf = value added per unit of
final output at free trade prices;

VAd= value added per unit of
output in presence of tariffs

With m inputs used the production of final output j,
VAf and VAdcan be written
as:

VAf =
(3)

and

(4)

where,

Pj = nominal price per unit of j at
free trade prices;

Pi = nominal price per unit of input i at free trade
prices;

aij = share of input i in cost of j at free trade
prices;

Tj = nominal tariff in ad valorem equivalent
of output j;

ti = nominal tariff in ad valorem equivalent
of input i.

With only one input and one output, equation [2] can be
simplified as follows:

Thus the higher the degree of tariff escalation, the greater
is the effective rate of protection enjoyed by the final-good industry, i.e. for
TW greater than zero (T > t), the ERP will be positive and greater than the
nominal tariffs on output. This can be illustrated by examples of green coffee
(denoted by A) and roasted coffee (denoted by B). Assuming aij of
0.6, a tariff of 20 percent on product B and 10 percent on A will result in ERP
of 30 percent. However, a 20 percent tariff on product B and a zero tariff on A
will result in ERP of 50 percent.

Thus, comparing nominal tariffs on inputs and output-product
within production chains gives a good indication of the sign of the effective
rate of protection, but obviously not the intensity of protection. A major
problem with the ERP measure, compared to the nominal tariff wedge measure,
however is that it requires accurate data on prices and technical input-output
coefficients, which are generally not available. While the ERP is relatively
more comprehensive in measuring protection resulting from tariff structure, it
has several limitations. Greenaway and Milner (2003) have summarized the
theoretical critique of the concept. Despite these limitations ERP remains one
of the major indicators to evaluate trade policy.

4. Tariff escalation and the Uruguay
Round - review of evidence

The reduction in overall tariff rates for agricultural
products during the Uruguay Round (UR) is considered a significant move in
reducing distortions in world agricultural markets and improving market access
conditions for agricultural exporters, including through reducing tariff
escalation.

Several studies have been conducted to assess the impact of
the Uruguay Round on tariff escalations in agricultural commodity markets. These
studies differ widely in terms of country and commodity coverage, type of
measures used (nominal wedges or effective rate of protection), level of tariff
aggregation used in the analysis and the stages of processing considered (first,
intermediate and final stages of processing). The studies reveal many results
and observations, but the major finding reached is the persistence of tariff
escalation, post-UR, in markets of both developed and developing
countries.

Almost all the studies have shown that while MFN tariffs have,
on average, been reduced post-UR, problems of high tariffs and tariff escalation
are still widespread. Lindland (1997) assessed the changes in tariff escalation
resulting from the UR tariff concessions, examining the agricultural import
markets of the EU, Japan and the United States. After a detailed comparison of
base bound tariffs resulting from commitments under the WTO Agreement on
Agriculture (AoA) for an extensive range of commodity pairs, it was concluded
that more than 80 percent of the bound tariff wedges between processed and
primary products had decreased as a result of the UR, creating thus additional
opportunities for developing countries to diversify their exports into higher
value-added processed products. However, after full implementation of the UR
commitments more than 50 percent of the commodity pairs examined would still
have escalating bound tariffs, with an average nominal tariff wedge of 17
percent. The study shows that the highest post-UR bound tariff escalation was
present in the dairy, sugar, fruit, tobacco and hides and skins sectors (See
Table 3).

a Tariff wedge measures the difference
between tariffs in primary and processed stages, calculated as T-t, where t
stands for tariff at the primary stage and T for tariff at the processed
stage.

Source: Lindland (1997).

Similar results were obtained in a study conducted by the OECD
in 1996. The study pointed out that in the OECD countries in general tariffs are
not reduced more for processed than for basic agricultural products. A recent
UNCTAD study (UNCTAD, 2003) evaluated tariff escalation for 12 agricultural
commodity groups by averaging nominal tariffs by major groups and by processing
stage in the Quad (Canada, the EU, Japan, and the US) markets. It was noticed
that, with a few exceptions, post-UR tariffs escalate not only between raw and
semi-finished but also, where appropriate, between semi-finished and finished
products. On average, the escalation in Canada and Japan and the EU is higher
between raw and finished, while in the United States the highest average
escalation is found between semi-finished and finished goods.

Some of the studies have examined tariff escalation in markets
of both developing and developed countries. A recent USDA study, calculating
simple average of bound MFN tariffs for a number of agricultural commodity
groupings by region, has shown that tariff escalation in agricultural markets
exists in both developed and developing
countries.[82] UNCTAD (2003) reached similar
results.

Notwithstanding the progress that has been made in assessing
tariff escalation across commodities and countries, much scope for improvement
remains. There are several areas where more improvements may be particularly
useful.

First, most of the past studies assessing the impact of the
Uruguay Round on tariff escalation have used bound tariffs. This has the
advantage of providing a measure of tariff escalation WTO members have
negotiated. However, actual applied tariffs are often much below the bound
rates. In addition, tariff preferences, which operate for various groups of
countries, are often ignored. This is mostly because such data have not been
available in a form that analysts could readily use. A recent study by
Chevassus-Lozza and Gallezot (2003) shows that tariff escalation in the EU is
lower when tariff preferences are taken into account. Therefore, analysing
escalation in applied tariffs would be necessary, particularly in view of the
presence of tariff preferences from which a large number of developing countries
benefit.

Second, findings on incidence of tariff escalation differ
significantly between studies employing different levels of commodity and
country aggregations. Averages of tariffs by major commodity groups and/or by
importing region or country groups provide, however, an incomplete picture of
level of protection accorded by existing tariff structure. Such averages conceal
significant tariff escalation at the product-by-product pairs. A more
disaggregated analysis is required to arrive at representative indicators of
tariff escalation.

Furthermore, there is a need to assess impact of tariff
escalation on trade of processed products. Most of the studies focus on
assessing the magnitude and change in tariff escalation and less on what the
impact of the escalating tariffs would be on the structure of trade. OECD
(1996), UNCTAD (2003) and Rae and Josling (2003) are among the few studies that
assess the effect of changes in tariff structures on exports of processed
products from developing countries. Simulation results in these studies have
shown that developing countries would accrue significant benefits from
liberalization of processed products compared with primary products. Overall,
what matters is the magnitude of the effect of tariff escalation on production
and trade flows: this would require not only assessing the protection it
accorded to processing but also the impact it may have on trade
structure.

To complement analyses of previous studies, this article
examines escalation in bound as well as applied tariffs for selected
agricultural commodity chains in the major developed and developing country
markets. The previous studies have focused almost exclusively on bound tariffs.
A simple approach has been adopted by measuring nominal tariff wedges for
selected commodity chains, at a highly disaggregated level and mostly at the
first stage of processing. Lack of detailed data precludes the estimation of the
effective rate of protection for the selected commodities.

The choice of countries reflects the major importers of
agricultural products, i.e. the Quad countries. In addition, the major four or
five developing country importers are included when information on relevant
product chains is readily available.[83] The
selected commodity chains include both basic food products, which are
predominantly temperate-zone products, and tropical and horticultural products.
Specific tariffs are converted to ad valorem rates using Agricultural Market
Access Database (AMAD) data on world unit values and exchange rates.

Annex tables 1 and 2 draw on data from AMAD and WITS database.
The tables report simple averages of applied and final bound MFN tariffs
countries apply to primary and processed forms of the selected commodities. It
should be noted that data on applied tariffs are for the year 1999 or before,
while final bound MFN tariffs represent the rates that should be reached by the
end of the implementation period of tariff reduction commitment under the
Uruguay Round Agreement on Agriculture - 2000 for developed countries and 2004
for developing countries. This may explain the few cases where applied MFN rates
were higher than the bound rates as, for example, in the case of raw sugar in
Japan.

Three broad observations can be drawn from tariff data in
Annex tables 1 and 2.

Tariff escalation prevails in a large number of commodity
chains. Comparing tariffs of the selected commodities at the different
stages, it is clear that nominal tariff escalation affects many commodities, and
this is true for both bound and applied tariffs. Of the 16 commodity chains
examined, 12 suffer from tariff escalation, mostly at the first stage of
processing, across the selected countries. The majority (nearly 60 percent) of
tariff escalation pairs have tariff wedges between 1 and 10 percent, while about
10 percent have tariff wedges exceeding 50 percent.

Tariff escalation is higher in the case of bound than
applied tariffs. As expected applied tariffs in almost all countries are, on
average, lower than bound tariffs, and in several cases this difference is very
large. As a result nominal wedges of applied tariffs for all the examined
commodity chains in the Quad group, apart from a few exceptions, are low
compared with bound rates (Figure 2).

Tariff escalation exists in both basic food commodities and
tropical and horticultural products. Of the nine basic food commodities included
in the study, wheat, groundnuts and rice are the only commodities where the
existence of escalating tariffs is fairly limited in the Quad countries (Annex
Table 1). When escalation exists in these products, it tends to be relatively
weak and in most cases, tariff de-escalation, i.e. tariff protection declining
with processing, is observed. As for livestock and meat (cattle, sheep and
pigs), sugar and soybeans, tariffs vary greatly between countries and tariff
escalation is common.

Figure 2: Average tariff wedge
in QUAD countries

Tariff escalation is more visible in agricultural raw
materials and horticultural products (Annex Table 2). It is worth noting that
while tropical products generally face lower tariffs compared with basic food
commodities, the wedge between tariffs at their primary and processed stages
tend to be higher than in basic food commodities. In cocoa, while the average
tariffs on cocoa beans is zero in the Quad countries, the bound rates on
chocolate are considerably higher, above 20 percent in the EU, Japan and Canada.
Coffee, hides and skins and cotton exhibit similar high tariff escalation. In
oranges, tariff escalation is more pronounced in the EU, while for the rest of
the countries tariffs are generally high but with relatively weak escalation
along the processing chain. In the case of tea tariff escalation does not seem
to exist in almost all countries apart from Japan.

Applied tariffs show escalation in some developing
countries. As Annex tables 1 and 2 show, tariff escalation exists in both
developed and developing countries. In developing countries, represented by 4-5
major importers of the particular commodity for which data were available,
tariffs vary greatly between countries and applied tariffs are much lower than
bound rates. Tariff escalation in these countries is more apparent in applied
than bound rates and, on average, occurred in 15 out of the 16 commodity chains
examined. These tariffs are often imposed for development or revenue-raising
reasons.[84]

Import tariffs decline significantly once account has been
taken of the preferences that developing countries receive. Average applied
tariffs as presented in Annex tables 1 and 2 are based on applied MFN rates
only. Drawing on available data from the World Integrated Trade Solution (WITS)
database, average applied tariffs for the EU were estimated taking into account
tariff preferences under Generalized System of Preferences (GSP) and African,
Caribbean and Pacific Group (ACP) preference regimes (Annex tables 3 and
4).

Annex tables 3 and 4 provide snapshot of the structure of EU
agricultural tariffs taking into account the GSP and ACP preference regimes. The
results show that in 11 out of the 16 examined product categories, tariff wedges
are relatively lower under GSP and ACP regimes. This suggests that, compared
with countries whose products face MFN tariffs in the EU market,
preference-receiving developing countries are in a better competitive position
in view of the relatively lower tariff wedges.

6. Tariff escalation and the new WTO
negotiations on agriculture

Tariff escalation has been raised as one of the important
market access issues in the current WTO negotiations on agriculture. Thirteen
out of the 45 country negotiating proposals asked for substantial reduction in
tariff escalation, particularly in the developed country
markets.[85] In these proposals, tariff
escalation is considered a key market access problem faced by commodity
exporters, and should thus be eliminated in order to help placing agricultural
commodities on the same footing as other products in the international trading
system.

The impact of further reduction of agricultural tariffs on
tariff escalation will depend a great deal on the method to be used in reducing
tariffs. Most of the country proposals addressing tariff escalation are
suggesting the adoption of a harmonizing reduction formula that reduces higher
tariffs by greater amounts, including tariff peaks, and eliminates tariff
escalation.

Two points are critical when assessing the implications of
tariff reduction proposals for tariff escalation: i) the change in the level of
tariff escalation in importing countries as a result of tariff reduction; and
ii) the influence this change may have on the structure of trade.

6.1 Impact on tariff escalation

The Draft of Modalities for the Further Commitments in the
context of the ongoing WTO negotiations on agriculture (Harbinson
proposal)[86] proposes a three-band reduction
formula (four-band for developing
countries).[87] This formula requires steeper
cuts in higher tariffs, with the condition that where the tariff on a processed
product is higher than the tariff for the product in its primary form, the rate
of tariff reduction for the processed product shall be equivalent to that for
the product in its primary form multiplied, at a minimum, by a factor of
1.3.

For comparison purposes, three different tariff reduction
methods - linear, Swiss formula (25 percent) and Harbinson proposal formula -
have been applied to the average bound MFN tariffs of selected products in the
Quad countries. As shown in Figure 3 (see Annex), the adoption of Harbinson
proposal and the "Swiss formula" appear to produce relatively more harmonized
tariff levels than the linear formula, with the Harbinson formula producing the
lowest tariff wedges. While the Harbinson proposal produces a significant
reduction in tariff escalation, it appears to erode much of the preferential
margins for developing countries. For instance, in the case of the EU's ACP
regime the average preferential margin for 13 of the selected commodity groups
will shrink from 8 percent to only 2.1 percent.

The Swiss formula seems to be more effective in reducing
tariff escalation when the level of tariffs is generally high, as in the case of
pineapples and poultry, more so than in the case of coffee and hides and skins
(tropical products), where tariffs are relatively low but tariff escalation is
high. It is very unlikely that the Swiss formula will achieve substantial
reduction in tariff escalation in all commodities of export interest to
developing countries, particularly tropical products, unless it involves some
additional criteria for capping tariff wedges along the processing
chain.

6.2 Implications for trade in processed
products

The existence of escalating tariffs is neither a necessary nor
a sufficient condition to establish a bias against processed goods (Yeats,
1984). The actual economic effects of tariff escalation on trade are affected by
import demand elasticities for the goods in question. To account properly for
the influence of escalating tariffs on the structure of trade, one must analyse
changing conditions of demand at different levels of processing along the
commodity chain. Since empirical studies show import demand elasticities
normally increase with fabrication, constant tariffs will have relatively larger
trade effects on fabricated commodities than on unprocessed commodities. Thus
the higher the demand elasticity along the commodity processing chain, the
higher would be the effect of escalating tariffs on processed commodity
trade.

Using the UNCTAD-FAO Agricultural Trade Policy Simulation
Model (ATPSM)[88] a simple exercise has been
undertaken to simulate the effects of changes in tariff escalation, under the
Harbinson proposal, on selected processed products. The model includes only a
few processed products, namely, roasted coffee, cocoa butter, cocoa powder,
chocolate and vegetable oils. Apart from oilseeds, existing tariffs on primary
and processed forms of these products show a clear pattern of escalation. The
model results for these products (Table 4) show a reduction in tariff wedges for
coffee and cocoa products with sizeable increases in global exports of their
processed forms, with gains in exports being relatively higher for developing
countries and LDCs.

a Tariff wedge measures the difference
between tariffs in primary and processed stages, calculated as T-t, where t
stands for tariff at the primary stage and T for tariff at the processed
stage.

Source: ATPSM simulation results.

More elaborate analysis by expanding the number of processed
products included in the ATPSM model would certainly help in providing a better
perspective on the impact of tariff structure on processed agricultural
trade.

7. Conclusions and policy
issues

Tariff escalation biases protection in both developed and
developing countries against agricultural and labour-intensive products. This
holds back export-led growth and greater diversification in developing countries
and the poverty reduction that is associated with increased demand for unskilled
labour.

Available evidence suggests that tariff escalation prevails in
a large number of agricultural commodity chains in both developed and developing
countries. It is more pronounced in commodity sectors such as meat, sugar,
fruit, coffee, cocoa and hides and skins, most of which are of export interest
to many of the poor developing countries.

Reducing tariff escalation is considered a critical element of
the development dimension of the current round of multilateral trade
negotiations, as it is seen to add considerably to the export potential of
commodity exporting developing countries. Several issues of escalating tariff
structure must be addressed when evaluating tariff reduction in the context of
the multilateral reform of agriculture.

First, it should be noted that the economic significance of
tariff escalation lies more in accurate assessment of the protection they create
along the commodity chains, which depends not only on nominal tariffs imposed
but also on the share of inputs in the value of final product. Assessing tariff
escalation on the basis of tariff wedges only, particularly at higher levels of
commodity aggregation, is not a reliable indicator of tariff escalation, as it
may conceal considerable tariff wedge in certain product lines of export
interest to many exporters of agricultural products.

Second, a distinction must be drawn between the level of
tariff escalation and the bias that tariff escalation poses for processed
commodity trade.[89] Though useful, the tariff
wedge and ERP indicators, do not provide policy makers and trade negotiators
very reliable information on the trade and welfare effects of tariff escalation.
The mere comparison of nominal tariffs or effective tariffs at different stages
of processing does not convey sufficient information on the relative importance
of existing trade barriers. The optimal approach would be to assess the effects
of the tariff structure on trade of the particular products. Thus, to account
properly for the effect of tariff escalation, one must analyse changing
conditions of demand at different levels of processing.

Third, efforts to reduce tariff escalation should take into
account the implications for tariff preferences. The analysis of this article
suggests that while the adoption of a harmonizing method such as that
incorporated in the Harbinson proposal would result in greater reduction in
tariff escalation than linear methods, it may lead to considerable erosion of
tariff preferences like those under the GSP and ACP preference
regimes.

In addition, tariff escalation will have to be evaluated in
conjunction with other trade barriers, not captured by the tariff data, like
tariff rate quota and special safeguards.

Chevassus-Lozza, E. & Gallezot, J. 2003.
Preferential agreements - tariff escalation: what are the consequences of the
multilateral negotiations for the access of developing countries to the European
Market? Paper presented at the International Conference on Agricultural Policy
Reform and the WTO: Where are we heading? Capri, Italy, June 2003.

Corden, W.M. 1966. The Structure of a Tariff System and
the Effective Protection Rate, Journal of Political Economy,
74:221-37.

Poonyth, D. & Sharma, R. 2003. The impact of the
WTO negotiating modalities in the areas of domestic support, market access and
export competition on developing countries: results from ATPSM. Paper presented
at the International Conference on Agricultural Policy Reform and the WTO: Where
are we heading? Capri, Italy June 2003.

WTO. 2003. Negotiations on agriculture: First draft
of Modalities for the further commitments: WTO Committee on Agriculture
and Negotiations on agriculture: First draft of modalities for the further
commitments - revision. Committee on Agriculture Special Session.
(N/AG/W/1/Rev.1), 18 March 2003.

Yeats, A. 1984. On the analysis of tariff escalation:
is there a methodological bias against the interest of developing countries?
Journal of Development Economics, May June August
15(1,2,3):77-88.

Annex

Table 1. Average bound and applied tariffs and nominal
tariff wedges (TW) in the major importing developed and developing countries:
selected basic food commodities

Table 2. Average bound and applied tariffs in the major
importing developed and developing countries: selected raw material and
horticultural products

Product a

Average final bound MFN tariffs b

Average applied MFN tariffs c

US

EU

Japan

Canada

Major 4 - 5 importing developing countries d

US 1999

EU 2000

Japan 1999

Canada 1998

Major 4 - 5 importing developing countries d

Cocoa

Beans

0

0

0

0

32.0

0

0

0

0

9.5

Paste

0.1

9.6

7.5

0

33.3

0.1

10.0

9.0

0

10.6

- TW e

0.1

9.6

7.5

0

1.3

0.1

10.0

9.0

0

1.1

Chocolate

14.7

21.1

21.3

52.8

44.3

17.7

21.1

23.6

54.2

16.6

- TW

14.6

11.5

13.8

52.8

11.0

17.6

11.1

14.6

54.2

6.0

Coffee

Green

0

0

0

0

39.8

0

0

0

0

24.8

Roasted

0

9.0

12.0

0.4

32.7

0

9.0

13.0

0

29.3

- TW

0

9.0

12.0

0.4

-7.1

0

9.0

13.0

0

4.5

Black Tea

Bulk

0

0

6.7

0

81.8

0

0

7.0

0

25.5

Other

0

0

14.5

0

83.8

0

0

15.5

0

26.6

- TW

0

0

7.8

0

2.0

0

0

8.5

0

1.1

Oranges

Fresh

3.5

16.7

24.0

0

41.0

3.7

16.7

25.0

0

23.7

Juice

6.8

44.1

28.1

1.0

41.0

6.9

44.1

31.9

1.0

25.7

- TW

3.3

27.4

4.1

1.0

0

3.2

27.4

6.9

1.0

2.0

Pineapple

Fresh

1.2

5.8

12.1

0

38.2

1.3

5.8

13.0

0

19.8

Juice

4.1

33.0

32.3

0

42.2

4.4

33.0

32.3

0

25.4

- TW

2.9

27.2

20.2

0

4.0

3.1

27.2

20.2

0

5.6

Hides & skins

Raw

0

0

0

0

20.9

0

0

0

0

4.1

Tanned

3.0

5.4

23.5

6.3

30.3

2.9

5.4

14.9

0

6.7

- TW

3.0

5.4

23.5

6.3

9.4

2.9

5.4

14.9

0

2.6

Cotton

Lint

11.3

0

0

0

41.0

8.7

0

0

0

4.3

Yarn

8.3

4.0

4.7

8.0

52.7

6.8

4.8

4.1

5.3

12.9

- TW

-3.0

4.0

4.7

8.0

11.7

-1.9

4.8

4.1

5.3

8.6

Notes:

a For the Harmonized System
(HS) levels covered, see Box 1.

b The bound and applied rates are simple averages,
mostly at the 6-digit of the Harmonized System (HS), after excluding tariff
lines that are not corresponding between bound and applied schedules. Specific
rates are converted to ad valorem rates using AMAD's data on world unit values
and exchange rates. The world import unit values were defined at the 6-digit HS
level.

c Applied rates are taken from AMAD - 1999 for
Japan and the US; 1998 for Canada; and various years from 1995 to 1999 for the
developing countries. For the EU, however, applied rates are for the year 2000
and are estimated from The International Customs Journal, EU - 1999-2000,
22nd edition.

d For developing countries included in the
analysis, see Box 2. e Only ad valorem tariffs are
considered.

e Tariff wedge measures the difference between
tariffs in primary and processed stages, calculated as T-t, where t stands for
tariff at the primary stage and T for tariff at the processed stage.

Table 3. EU: average MFN tariffs and average tariffs
under GSP and ACP preference regimes, 2000

Product

MFN

GSP

ACP (out of quota)

Wheat

Durum

69.5

69.5

69.5

Meal/flour

74.6

74.6

60.8

- TW a

5.1

5.1

-8.7

Rice

Husk/husked

300.7

300.7

298.1

Glazed/polished

136.0

136.0

136.0

- TW

-164.7

-164.7

-162.1

Cattle

Live

35.9

35.9

31.7

Fresh/frozen meat

128.6

128.6

97.1

- TW

92.7

92.7

65.4

Pig & Pig meat

Live swine

16.0

16.0

13.6

Fresh/frozen pork

32.0

32.0

32.0

- TW

16.0

16.0

18.4

Sheep and sheep meat

Live sheep

63.8

63.8

0

Fresh/frozen mutton

88.7

88.7

67.9

- TW

24.9

24.9

67.9

Poultry

Live poultry

10.4

10.4

8.8

Fresh/frozen poultry

39.5

39.5

39.5

- TW

29.1

29.1

30.7

Soybeans

Seeds

0

0

0

Crude oil

4.8

4.1

0

- TW

4.8

4.1

0

Groundnuts

Seeds

0

0

0

Crude oil

4.8

4.4

0

- TW

4.8

4.4

0

Sugar

Raw

134.7

134.7

134.7

Refined

161.1

161.1

161.1

- TW

26.4

26.4

26.4

a Tariff wedge measures the difference
between tariffs in primary and processed stages, calculated as T-t, where t
stands for tariff at the primary stage and T for tariff at the processed
stage.

Source: WITS, 2003.

Table 4. EU: average MFN tariffs and average tariffs
under GSP and ACP preference regimes, 2000

Product

MFN

GSP

ACP (out of quota)

Cocoa

Beans

0

0

0

Chocolate

43.0

40.0

10.0

- TW a

43.0

40.0

10.0

Coffee

Green

0

0

0

Roasted

9.0

3.1

0

- TW

9.0

3.1

0

Black Tea

Bulk

0

0

0

Other

0

0

0

- TW

0

0

0

Oranges

Fresh

16.7

16.7

3.1

Juice

34.9

24.7

13.6

- TW

18.2

8

10.5

Pineapple

Fresh

5.8

4.9

0

Juice

34.9

23.2

0

- TW

29.1

18.3

0

Hides & skins

Raw

0

0

0

Tanned

5.4

4.4

0

- TW

5.4

4.4

0

Cotton

Lint

0

0

0

Yarn

4.0

3.9

0

- TW

4.0

3.9

0

a Tariff wedge measures the difference
between tariffs in primary and processed stages, calculated as T-t, where t
stands for tariff at the primary stage and T for tariff at the processed
stage.

Source: WITS, 2003.

Figure 3. Changes in average
tariffs in Quad countries under different tariff reduction methods

Source: FAO staff calculations, based on
Agricultural Market Access Database (AMAD), and WTO country schedules of
commitments in goods.

Notes:

1. The figures above show impact on average tariff of the
selected products in the Quad countries by applying three possible tariff
reduction formulae. The formulae are as follows:

Formula

Mathematical Expression

a. Linear cut

t1 = t0 * (1 - 0.36)

b. Swiss formula, with a coefficient of 25 %

t1 = (a*t0)/(a + t0); a is a
parameter = 0.25

c. Harbinson formula

t1 = t0 * (1 - R), where R = 0.6 for
t0 > 90; 0.5 for 90 £ t0
³ 15; and 0.4 for t0 < 15. In the
case of a processed product with a higher tariff than for its primary form, R is
equal to the tariff on the primary form multiplied by 1.3 where t0 =
base tariff and t1 = new tariff.

2. Tariff wedge, as defined here, measures the
difference between tariffs in primary and processed stages, calculated as t - T,
where t stands for tariff at the primary stage and T for tariff at the processed
stage. Thus, high negative value of the wedge indicates high tariff
escalation.

The major 4-5 importing developing countries of each of the
commodity chains considered by the study, and for which data were available,
include:

Cattle:

Mexico, Indonesia, Philippines, Egypt, Brazil

Sugar:

Indonesia, India, Philippines, Republic of Korea,
Morocco

Pigs:

Singapore, Mexico, Philippines, Republic of Korea,
Thailand

Pineapples:

Republic of Korea, Argentina, Philippines, Mexico,
Brazil

Sheep:

Nigeria, Bahrain, Mexico, Côte d'Ivoire

Oranges:

Morocco, Egypt, Argentina, Brazil, Uruguay

Poultry:

Singapore, Brazil, Indonesia, Thailand, Turkey

Cocoa:

Mexico, Brazil, Republic of Korea, Philippines,
Argentina

Wheat:

Brazil, Egypt, Indonesia, Republic of Korea, Pakistan,
Philippines

Coffee:

Republic of Korea, Argentina, Morocco, Mexico

Rice:

Indonesia, Brazil, Republic of Korea, Jamaica, Peru

Tea:

Morocco, India, Indonesia, Argentina, Pakistan

Soybeans:

Pakistan, India, Brazil, Morocco

Hides & skins:

Mexico, Indonesia, Republic of Korea Brazil

Groundnuts:

Thailand, India, Brazil, Singapore

Cotton:

Indonesia, Mexico, India, Thailand, Republic of
Korea

Dairy:

Brazil, Mexico, Singapore, Philippines

[77] OECD (1996).[78] Malaysia and Chile are
examples of developing countries that have succeeded in diversifying their
agricultural exports.[79] For a detailed
description of dependence on agricultural commodity exports, see FAO
(2002).[80] In 1996, for example,
four companies accounted for 50 percent of roasted coffee. and the number of
cocoa trading houses in London decreased from 30 in 1980 to about ten in 1999.
Similarly, the six largest chocolate manufacturers account for half of world
chocolate sales. For vegetable oils, following mergers and acquisitions in the
1990s, a small number of MNEs now dominate the production, distribution and
trade in oilseeds and oils. For grains, a few big companies have become
vertically integrated businesses in trading, storage, processing and milling
(see FAO 2003).[81] ERP was first
articulated by Corden (1966).[82] USDA (2001).[83] See Box 2 for lists of
developing countries selected for each commodity chain.[84] Article XVIII of GATT
1947 recognizes the need of countries in the early stages of development to
maintain sufficient flexibility in their tariff structure to be able to grant
tariff protection required for the support of their infant industries.[85] See, for example, the
negotiating proposals of the African group (G/AG/NG/W/142); ASEAN
(G/AG/NG/W/55); Cairns Group (G/AG/NG/W/54 and 93); US (G/AG/NG/W/15); CARICOM
(G/AG/NG/W/100); Canada (G/AG/NG/W/12); Developing country grouping
(G/AG/NG/W/13).[86] WTO (2003).[87] The Harbinson Draft
proposed reducing tariff in equal annual instalments over a period of [five]
years, applying the following formula:

(i) For all agricultural tariffs greater than [90 percent ad
valorem] the simple average reduction rate shall be [60] percent subject to a
minimum cut of [45] percent per tariff line.

(ii) For all agricultural tariffs lower than or equal to [90
percent ad valorem] and greater than [15 percent ad valorem] the simple average
reduction rate shall be [50] percent subject to a minimum cut of [35] percent
per tariff line.

(iii) For all agricultural tariffs lower than or equal to [15
percent ad valorem] the simple average reduction rate shall be [40] percent
subject to a minimum cut of [25] percent per tariff line.

(iv) For developing countries, a four-band formula, with less
reduction rates was also suggested (see WTO (2003) TN/AG/W/1/Rev.1), p.
4.[88] For a brief description
of the specifications and policy parameters of the ATPSM see Poonyth and Sharma
(2003).[89] For detailed discussion
on the link between tariff escalation and the bias in trade protection, see
Yeats (1984).